In the last two weeks, both the Agency for the Cooperation of Energy Regulations (ACER) and the European Securities and Markets Authority (ESMA) have published consultations for market participants on the Regulation on wholesale energy market integrity and transparency (REMIT) and the European Market Infrastructure Regulation (EMIR), respectively. This article considers some of the issues that have been raised by both consultation papers and outlines the areas where the input of markets participants has been sought.
EMIR was introduced to regulate the over-the-counter (OTC) derivatives market, with the aim of mitigating counterparty risk. EMIR requires the clearing of trades by central counterparties and the reporting of trades to a trade repository. It will apply to all financial counterparties and to non-financial counterparties (counterparties, who, by elimination, are not financial counterparties), in certain circumstances.
Following EMIR's adoption by the European Parliament, ESMA has published a consultation (the EMIR consultation), seeking the views of market participants on proposed technical standards that will be included in the final text of EMIR. The technical standards are the details that will make EMIR work and will determine who and what is subject to it. The EMIR Consultation follows the publication of the discussion paper in which ESMA published preliminary views on the draft technical standards. Below we consider some of the provisions that are dealt with by the EMIR consultation that, until now, have been the cause of general uncertainty for market participants.
Non-financial counterparties will only be required to clear contracts when they exceed a (yet to be announced) prescribed threshold. Trades entered into that can be described objectively as reducing risks relating directly to the commercial activity or treasury financing activity of the counterparty (i.e., entered into for hedging and non-speculative purposes), will not count towards ascertaining whether or not the non-financial counterparty has exceeded the prescribed threshold. Exactly how "entered into to reduce risks" should be defined is a question raised by the EMIR consultation. ESMA states that it expects that those trades that would qualify as a bona fide hedge under the Generally Accepted Accounting Principles are likely to be classed as a trade entered into to reduce risks under EMIR.
Following comments received by ESMA on the discussion paper, however, ESMA has taken the view that "proxy hedging" trades should also be excluded when calculating whether or not the prescribed threshold has been crossed. This is because there may be circumstances where it is not possible to enter into an OTC contract that relates directly to the exact risk to be covered, but only one that relates to a closely correlated instrument that also achieves objective risk reduction. Views are sought on whether the amended definition of hedging provides enough legal certainty.
Regarding the clearing threshold itself, ESMA is proposing to set the bar relatively low, to ensure that counterparties with activity levels that may create significant risk to the market are captured by EMIR. ESMA is...